DULUTH HOLDINGS INC. The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and the accompanying notes and information contained in other sections included elsewhere in this annual report, particularly, "Risk Factors," and "Business." This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to our management. The statements in this discussion and analysis concerning expectations regarding our future performance, liquidity and capital resources, as well as other non-historical statements in this discussion and analysis, are forward-looking statements. See "Forward-Looking Statements." These forward-looking statements are subject to numerous risks and uncertainties, including those described under "Risk Factors." Our actual results could differ materially from those suggested or implied by any forward-looking statements.
Management's discussion focuses on fiscal 2022 results compared to fiscal 2021.
Fiscal year 2022 and 2021 were 52-week periods. For a discussion of fiscal 2021
results compared to fiscal 2020, refer to the Company's Annual Report on Form
10-K for the year ended
Overview
We are a lifestyle brand of men's and women's casual wear, workwear and
accessories sold primarily through our own omnichannel platform. We offer
products nationwide through our website and catalog. In 2010, we initiated our
omnichannel platform with the opening of our first store. Since then, we have
expanded our retail presence, and as of
We offer a comprehensive line of innovative, durable and functional products, such as our Longtail T® shirts, Buck NakedTM underwear, Fire Hose® work pants and No-Yank™ Tank, which reflect our position as the Modern, Self-Reliant American Lifestyle brand. Our brand has a heritage in workwear that transcends tradesmen and appeals to a broad demographic for everyday and on-the-job use.
From our heritage as a catalog for those working in the building trades, Duluth Trading has become a widely recognized brand and proprietary line of innovative and functional apparel and gear. Over the last decade, we have created strong brand awareness, built a loyal customer base and generated robust sales momentum. We have done so by sticking to our roots of "there's gotta be a better way" and through our relentless focus on providing our customers with quality, functional products.
A summary of our financial results is as follows:
?Net sales in fiscal 2022 decreased by 6.5% over the prior year to
?Net income in fiscal 2022 was
?Adjusted EBITDA in fiscal 2022 decreased 43.8% over the prior year to
See "Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA"
section for a reconciliation of our net income to EBITDA and EBITDA to Adjusted
EBITDA, both of which are non-
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Our management's discussion and analysis includes market sales metrics for our
stores, website and catalog sales. Market areas are determined by a third-party
that divides
Economic Conditions
The ultimate impact of higher inflationary periods on our operational and financial performance still depends on future developments outside of our control. Given the uncertainty, we cannot reasonably estimate store traffic patterns and the prolonged impact on overall consumer demand. ?
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How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of financial and operating measures that affect our operating results.
Net sales reflect our sale of merchandise plus shipping and handling revenue collected from our customers, less returns and discounts. Direct-to-consumer sales are recognized upon shipment to a customer, while store sales are recognized at the point of sale.
Gross Profit
Gross profit is equal to our net sales less cost of goods sold. Gross profit as a percentage of our net sales is referred to as gross margin. Cost of goods sold includes the direct cost of purchased merchandise; inventory shrinkage; inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost and net realizable reserves; inbound freight; and freight from our fulfillment centers to our retail stores. The primary drivers of the costs of individual goods are raw material costs. Depreciation and amortization are excluded from gross profit. We expect gross profit to increase to the extent that we successfully grow our net sales. Shipping and handling revenue is also reflected in our gross profit and gross profit margin. Our gross profit may not be comparable to other retailers, as we do not include distribution network and store occupancy expenses in calculating gross profit, but instead we include them in selling, general and administrative expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include all operating costs not included in cost of goods sold. These expenses include all payroll and payroll-related expenses and occupancy expenses related to our stores and to our operations at our headquarters, including utilities, depreciation and amortization. They also include marketing expense, which primarily includes television, digital and social media advertising, catalog production, mailing and print advertising costs, as well as all logistics costs associated with shipping product to our customers, consulting and software expenses and professional services fees. Selling, general and administrative expenses as a percentage of net sales is usually higher in lower-volume quarters and lower in higher-volume quarters because a portion of the costs are relatively fixed.
While we expect these expenses to increase as we continue to increase brand awareness and invest in infrastructure to support our business, we believe these expenses will decrease as a percentage of sales over time. Our shipping and handling expenses typically increase during the second half of the year due to additional surcharges during our peak selling season.
Adjusted EBITDA
We believe Adjusted EBITDA is a useful measure of operating performance, as it provides a clearer picture of operating results by excluding the effects of financing and investing activities by eliminating the effects of interest and depreciation costs and eliminating expenses that are not reflective of underlying business performance. We use Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business.
We define Adjusted EBITDA as consolidated net income before depreciation and amortization, interest expense and provision for income taxes adjusted for the impact of certain items, including non-cash and other items we do not consider representative of our ongoing operating performance. We believe Adjusted EBITDA is less susceptible to variances in actual performance resulting from depreciation, amortization and other items. This non-GAAP measure may not be comparable to similarly titled measures used by other companies.
Free Cash Flow
We believe Free Cash Flow is a useful measure of performance as an indication of our financial strength and provides additional perspective on our ability to efficiently use capital in executing our growth strategy. We use Free Cash Flow to facilitate a comparison of our operating performance on a consistent basis from period-to-period and our ability to generate cash.
We define Free Cash Flow as net cash provided by operating activities less purchase of property and equipment. This non-GAAP measure may not be comparable to similarly titled measures used by other companies.
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Results of Operations
The following table summarizes our consolidated results of operations for the periods indicated, both in dollars and as a percentage of net sales.
Fiscal Year Ended
January 29, 2023 January 30, 2022
(in thousands)
Net sales 653,307 698,584
Cost of goods sold (excluding depreciation and
amortization) 309,872 321,260
Gross profit 343,435 377,324
Selling, general and administrative expenses 337,204 333,225
Operating income 6,231 44,099
Interest expense 3,653 4,717
Other income, net 376 55
Income before income taxes 2,954 39,437
Income tax expense 708 9,887
Net income 2,246 29,550
Less: Net loss attributable to noncontrolling
interest (58) (152)
Net income attributable to controlling interest $ 2,304 $ 29,702
Percentage of Net sales:
Net sales 100.0 % 100.0 %
Cost of goods sold (excluding depreciation and
amortization) 47.4 % 46.0 %
Gross profit 52.6 % 54.0 %
Selling, general and administrative expenses 51.6 % 47.7 %
Operating income 1.0 % 6.3 %
Interest expense 0.6 % 0.7 %
Other income, net 0.1 % - %
Income before income taxes 0.5 % 5.6 %
Income tax expense 0.1 % 1.4 %
Net income 0.3 % 4.2 %
Less: Net loss attributable to noncontrolling
interest - % - %
Net income attributable to controlling interest 0.3 % 4.2 %
Fiscal 2022 Compared to Fiscal 2021
Net sales decreased
Store market net sales decreased
Gross Profit
Gross profit decreased
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
The increase in selling, general and administrative expense was primarily caused by increased depreciation expense from continued investments in technology and throughout our fulfillment network.
Interest Expense
Interest expense decreased
Income Taxes
Income tax expense was
Net Income Attributable to Controlling Interest
Net income attributable to controlling interest was
Non-GAAP Financial Measures
See the above section titled "How We Assess the Performance of Our Business," for our definition of Adjusted EBITDA and Free Cash Flow.
Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA
The following table represents reconciliations of net income to EBITDA and EBITDA to Adjusted EBITDA for the periods indicated below.
Fiscal Year Ended
January 29, 2023 January 30, 2022
(in thousands)
Net income $ 2,246 $ 29,550
Depreciation and amortization 30,810 29,225
Amortization of internal-use software hosting
?subscription implementation costs 3,392 1,797
Interest expense 3,653 4,717
Income tax expense 708 9,887
EBITDA (non-GAAP) 40,809 75,176
Stock based compensation 2,711 2,198
Adjusted EBITDA (non-GAAP) $ 43,520 $ 77,374
As a result of the factors discussed above in the "Results of Operations"
section, Adjusted EBITDA decreased
Free Cash Flow
The following table represents a reconciliation of Net cash provided by
operating activities, the most comparable
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Fiscal Year Ended
January 29, 2023 January 30, 2022
(in thousands)
Net cash (used in) provided by operating
activities $ (5,628) $ 91,981
Purchases of property and equipment (22,833) (10,352)
Free Cash Flow (non-GAAP) $ (28,461) $ 81,629
Free cash flow decreased
Liquidity and Capital Resources
General
Our business relies on cash from operating activities and a credit facility as
our primary sources of liquidity. Our primary cash needs have been for
inventory, marketing and advertising, payroll, store leases, and capital
expenditures associated with infrastructure and information technology. The most
significant components of our working capital are cash, inventory, accounts
payable and other current liabilities. At
We spent
We believe that our cash flow from operating activities and the availability of cash under our credit facility will be sufficient to cover working capital requirements and anticipated capital expenditures for the foreseeable future.
Cash Flow Analysis
A summary of operating, investing and financing activities is shown in the
following table.
Fiscal Year Ended
January 29, 2023 January 30, 2022
(in thousands)
Net cash (used in) provided by operating activities $ (5,628) $ 91,981
Net cash used in investing activities (22,641) (10,150)
Net cash used in financing activities (3,234) (51,364)
(Decrease) Increase in cash and cash equivalents $ (31,503) $ 30,467
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Net Cash Provided by Operating Activities
Operating activities consist primarily of net income adjusted for non-cash items that include depreciation and amortization, stock-based compensation and the effect of changes in assets and liabilities.
For fiscal 2022, net cash used in operating activities was
For fiscal 2021, net cash provided by operating activities was
Investing activities consist primarily of capital expenditures related to a new fulfillment center and information technology.
For fiscal 2022, net cash used in investing activities was
For fiscal 2021, net cash used in investing activities was
Financing activities consist primarily of borrowings and payments related to our revolving line of credit and other long-term debt, as well as payments on finance lease obligations.
For fiscal 2022, net cash used in financing activities was
For fiscal 2021, net cash used in financing activities was
Credit Agreement
On
On
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the Company's rent adjusted leverage ratio. The New Credit Agreement is secured by essentially all Company assets and requires the Company to maintain compliance with certain financial and non-financial covenants, including a maximum rent adjusted leverage ratio and a minimum fixed charge coverage ratio as defined in the New Credit Agreement.
On
Contractual Obligations
In connection with our investing and operating activities, we have entered into certain contractual obligations. See Note 3 "Leases" of Notes to Consolidated Financial Statements for additional discussion of these obligations.
Off-Balance Sheet Arrangements
We are not a party to any significant off-balance sheet arrangements.
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in
We evaluated the development and selection of our critical accounting estimates and believe that the following involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are therefore discussed as critical.
Product Return Reserve
The Company currently estimates product return reserve using its own historical sales information. The Company regularly assesses and adjusts the estimate of accrued sales returns by updating return rates for actual company trends and projected costs. While returns have historically been within our expectations, future return rates may differ from those experienced in the past. Changes in these estimates can have a material impact on our financial statements. We believe the accounting estimate related to product returns is a critical accounting estimate because it requires us to make assumptions about future potential returns, which are highly uncertain.
Critical Accounting Policies
With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. However, our historical results for the periods presented in the consolidated financial statements have not been materially impacted by such variances. More information on all of our significant accounting policies can be found in Note 2, "Summary of Significant Accounting Policies" of Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Leases
The Company recognizes ROU assets and lease liabilities related to leases on the Company's consolidated balance sheets. The Company determines if an arrangement is, or contains, a lease at inception. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities reflect the obligation to make lease payments arising from the lease. At any given time during the lease term, the lease liability represents the present value of the remaining lease payments and the ROU asset is measured at the amount of the lease liability, adjusted for pre-paid rent, unamortized initial direct costs and the remaining balance of lease incentives received. Both the lease ROU asset and liability are reduced to zero at the end of the lease. See Note 3 "Leases," of Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Revenue Recognition
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Revenue for merchandise that is shipped to our customers from our fulfillment centers and stores is recognized upon shipment following customer payment, which is when the customer obtains control of the product and has the ability to direct the use of the product, including, among other options, the ability to redirect the product to a different shipping destination. Store revenue is recognized at the point of sale. This represents the point at which the customer obtains control of the product and has the ability to direct the use of the product.
We recognize shipping and handling fees as revenue included in net sales when generated from a customer order upon shipment or at the point of sale. Costs of shipping and handling are included in selling, general and administrative expenses.
Sales tax collected is not recognized as revenue as it is ultimately remitted to governmental authorities.
We reserve for projected merchandise returns based on both historical and actual experience, as well as various other assumptions that we believe to be reasonable. Actual merchandise returns are monitored regularly and have not been materially different from the estimates recorded. Product returns often represent merchandise that can be resold. Amounts refunded to customers are generally made by issuing the same payment tender as used in the original purchase. Merchandise exchanges of the same product and price are not considered merchandise returns and are therefore excluded when calculating the sales returns reserve.
Inventories
Our inventories are composed of finished goods and are stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. Net realizable value is defined as the "estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation." The inventory value is adjusted periodically, if needed, to reflect current market conditions and inventory composition, which requires our judgments that may significantly affect the ending inventory valuation, as well as gross margin. The estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves) and estimates of inventory shrinkage. We adjust our inventory for obsolescence based on historical trends, aging reports, specific identification, current retail prices and our estimates of future retail sales prices.
Due to these factors, our obsolescence and shrinkage reserves contain uncertainties. Both estimates have calculations that require us to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. If actual observed obsolescence or periodic updates of our shrinkage estimates differ from our original estimates, we adjust our inventory reserves accordingly throughout the period. We do not believe that changes in the assumptions used in these estimates would have a significant effect on our net income or inventory balances. We have not made any material changes to our assumptions included in the calculations of the obsolescence and shrinkage reserves during the periods presented, nor have we recorded significant adjustments related to the physical inventory process.
The reserve for inventory shrinkage is adjusted to reflect the trend of historical physical inventory count results. The Company performs its retail store physical inventory counts in July and the difference between actual and estimated shrinkage, recorded in Cost of goods sold, may cause fluctuations, particularly in second fiscal quarter results.
Income Taxes
We account for income taxes and the related accounts using the asset and
liability method in accordance with ASC Topic 740, Income Taxes ("ASC 740").
Under this method, we accrue income taxes payable or refundable and recognize
deferred tax assets and liabilities based on differences between
We record net deferred tax assets to the extent we believe these assets will
more likely than not be realized. In making such determination, we consider all
available positive and negative evidence, including future reversals of existing
taxable temporary differences, projected future taxable income, tax planning
strategies and recent financial operations. A valuation allowance is established
if it is more likely than not that some portion or all of the deferred income
tax asset will not be realized. No valuation allowance was recognized for the
years ended
We establish assets and liabilities for uncertain tax positions taken or expected to be taken in income tax returns, using a more-likely-than-not recognition threshold. We recognize penalties and interest related to uncertain tax positions as income tax expense.
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See Note 9 "Income Taxes," of Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
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